My Investments: Lending Club

In an earlier article on nontraditional investments, I mentioned Lending Club.
Lending Club is the leader of the pack of a new breed of peer-to-peer lending platforms.  You can join Lending Club as a borrower or as a lender; for investment purposes, we're interested in the latter.

As a lender, you get to play bank: you can sort through borrowing requests, called 'Notes', and decide which ones you'd like to fund in $25 increments.  Each note contains information on the credit history and financial status of the borrower, the loan amount and term, and an interest rate calculated by Lending Club's proprietary risk evaluation models:

Once the Notes are issued, you begin receiving a stream of interest and principal payments, which you are free to withdraw or invest in more Notes.

I have been using Lending Club since May 2013, and my experience so far has been extremely good.  Overall I've invested $7,000 (280 Notes), and while four of these are currently late on payments, I have yet to have a default.  I have focused my efforts on C, D, E, and F-grade notes, which are slightly riskier but have higher predicted rates of return:

My returns so far have been quite nice, with a net annualized return of 20.41%.  I expect this to drop into the 10-12% range once defaults are accounted for, and taxes will take a bite of out these returns (though Lending Club does offer 401(k) rollover and IRA investment options!), but that's still a very nice return on investment.

Sites have sprung up that further slice-and-dice Lending Club return statistics based on factors like borrower state of residence.  I haven't used these sites (yet), instead relying primarily on... instinct, I guess!

Hands-On Investing

One thing to note is that LendingClub is not a 'hands-off' investment.  Some borrowers pay off their notes early, many notes that you select for funding inevitably are not approved, and repayment cash is constantly coming in.  You must actively sort through and evaluate Notes to choose those you'd like to invest in.  For these reasons, it's necessary to check in frequently and actively invest whatever cash is available in your account.  If you want something that you can set and forget, this is not it—stick to automatic investments in index mutual funds.

When browsing Notes, you can create, save, and load filters that only display Notes that conform to certain specifications (interest rate, loan size, payment delinquencies, borrower location).  These filters are key to quickly sorting through large numbers of Notes to find what you're looking for.  I'm not quite ready to share my Secret Sauce of filter settings, so you'll have to experiment and see what works for you.

LendingClub does offer a 'PRIME' automatic investment service that automatically buys notes on your behalf that meet your specifications, but it's only available to those with at least $25,000 invested and I have not used it.

Note Availability

At times, some have complained that Notes for funding are hard to come by on Lending Club.  This appears to be a cyclical problem related to the supply-demand balance on the site.

The loan volume on Lending Club continues to grow exponentially.  As they tweak their advertising volume to keep borrowers and lenders balanced, there can be time periods when the loan pickings are slim.  This isn't because they're not issuing loans—thousands of loans per day head out the door—but because there is tough competition with other investors.

New Notes are posted seven days a week at 06:00, 10:00, 14:00, and 18:00PM Pacific Time, so browse the site at these times for best Note availability.

Second (and Third, and Fourth...) Opinions

Much has been written on peer-to-peer lending, and a Google search will return dozens of reviews of Lending Club.  I recommend reading Mr. Money Mustache's Lending Club Experiment Series for another opinion on Lending Club as an investment platform.


If you have an established investment portfolio and you'd like to try something a little different, I would highly recommend checking out Lending Club.  For the optional 5-10% or so of your portfolio dedicated to higher-risk, less-diversified 'fun' investments, peer-to-peer lending sure beats penny stocks (and probably stock picking as well, for that matter).

If you're just looking to start investing, don't even think about it.  Off to index mutual funds you go!

It takes a bit of work to manage, but the interface is well-constructed and my experiences so far have been very positive.  It remains to be seen what sorts of long-term returns peer-to-peer lending will provide, but I foresee a bright future for the concept.  I'll post an update on my experiences in six months.